Savings vs Investments
With interest rates still at historically low levels, residential property prices too expensive and now seemingly stuck in a rut (and with the risk of a downturn), private investors should be forgiven for hiding their savings under their mattress! With limited prospects for a significant change in interest rates any time soon, it makes sense to look for alternatives.
In the UK alone a staggering £1.3trillion of household deposits earns negligible interest. With inflation running at more than the accounts are paying, there is a real danger that savings will continue to erode year-on-year.
Going back to basics, deposit accounts offer a return of interest and often with easy access. Typically, this would be kept for emergencies and/or known future expenditure. Most other options can be classed as investments, where the value of the asset can fluctuate but where return prospects can be much greater. During periods of growth, this can offset the damaging effects of inflation so that the “real value” of your investment goes up. If there is an income too (from rent or dividends for example), this can be used to meet regular expenditure or possibly reinvested to enhance returns.
Whilst property prices may struggle over the coming years from such inflated levels, the same may not be true for equity style assets particularly in the UK where prices have been held back due to Brexit uncertainty. Historically, annual returns have been in the order of 7% from this type of investment in the UK, a combination of inflation, dividends (from profits) and economic growth. As matters stand, the UK stock market (as measured by the FTSE All-share Index) is paying dividends of approximately 3.4% per annum alone. With inflation running at 1.5%, it is not difficult to see how the 7% average return can be achieved. Compare that to just 1% (before inflation) from a typical bank account.
Our view is that there is room for most individuals to have both money in bank accounts (for short-term needs) but also in stock market investments for longer term objectives, to pay for children’s education, lump-sum spending or retirement for example. Holding too much in either is unlikely to serve you well and the key is to have the right balance, depending upon individual circumstances.
Of course, stock market returns are not guaranteed and the value of share prices can fall as well as rise. Investments in the stock market are usually suitable for timeframes exceeding five years and where access to that money is unlikely to be required.